No stranger to lawsuits, importer Shelton Bros now finds itself in Guilford County, NC court, sued by Freedom Bev Co, based in Greensboro.  Freedom distributes numerous small brewers (Atwater, Cascade, Ipswich, Red Brick, Bruery and more) and wine brands, some statewide, in NC.  It’s had relationship selling many, tho not all, Shelton Bros brands since 2002.  Apparently they have no written contract, but the two cos have filed “Distribution Agreement Filing Forms” on record with state ABC commission.  So Freedom insists they have a “Distribution Agreement” covered by NC franchise law.  Among charges, Freedom alleges Shelton illegally:

1) terminated without cause; 2) set up dual distribution with competitor Proof Wine and Spirits in Sep this yr (Freedom also named Proof in suit); 3) discriminated among retailers by selling some beers to only two retailers in state; 4) discriminated against Freedom by allocating beer to Proof but refusing sales to Freedom; 5) tried to “establish or maintain” resale prices.  Freedom also sued Proof for tortious interference and both Shelton/Proof with unfair trade practices tied to Shelton’s creating new agreement.  Freedom seeks temporary restraining order to require Shelton to ship it beer, stop Shelton shipments to Proof, as well as treble damages and costs.

Tho Freedom sold Shelton brands in all but 5 NC counties for over decade, relationship soured at end of 2012, lawsuit recounts.  Shelton did fill end-of-yr order, allegedly stating “Freedom Beverage’s resale prices were too high.”  Shelton shipped no beer for most of 2013, “despite multiple purchase orders.”  In Oct tho, Shelton asked Freedom to fill orders from two key retailers, Total and Cost Plus, for holiday beers like Bad Elf, Santa’s Butt, Mikeller Christmas and others.  Freedom ordered about 800 cases for $29K.  After that, Shelton stopped shipping again and didn’t respond to orders.  In Aug this yr, Shelton made similar request for Freedom to fill orders for Total and Cost Plus.  Freedom again said it would comply and “ordered additional product.”  But Shelton shipped nothing.  Instead it entered into new agreement with Proof to “cover the entire state.”  At same time, Shelton sent letter to state ABC “stating that it entered into a written Distributor Appointment Agreement with Proof” asking ABC to appoint Proof as its distribs on “temporary” and “time limited basis” (presumably just to fill the Christmas beer orders), acknowledging “it had no release from Freedom.”

According to Shelton, Freedom never paid for all of the 2013 beer; Freedom insists Shelton owes it $13 on that beer.  (Yes, $13.)  Shelton also claims Freedom owes it cooperage fees; Freedom sez Shelton wanted Freedom to accumulate kegs before shipping them back to be more cost efficient and that Shelton “responsible for arranging and paying for shipments of kegs.”  (That dispute seems to involve several thousand dollars.) ABC counsel wrote Shelton in early Oct that “no changes will be made to distribution agreements currently in place.”  Tho Freedom remains “willing and able to distribute Shelton Brothers brands” in NC, it filed suit.

Sep 25 letter from prexy Dan Shelton to ABC is all we have of Shelton side of story for now.  Dan points to “very valuable relationships” it has developed with two natl beer chains that operate in NC and elsewhere.  “We rely on substantial sales volume generated from holiday beer programs with these chains each year.”  And if beer didn’t get to chains in NC, “we are in very serious risk of losing the business in nearly four dozen states across the country,” Dan pointed out.  He acknowledged they’d only done business with Freedom once in previous 18 mos and relationship had “deteriorated.”   (While Freedom charges Shelton only wanted holiday beers sold to those two retailers, Dan sez “one reason for our dissatisfaction with Freedom” is that it didn’t sell those brands “on its own initiative to any” other NC retailers.) Dan then claimed Freedom still owed him money for 2013 and still had cooperage. 

Despite the alleged debt and “continuing standoff regarding the legal status of the parties’ relationship” Shelton sought Freedom’s assistance again this yr.  But, according to Dan, Freedom “insisted that it would only fulfill the chain commitments if Shelton agreed immediately to sell to Freedom relatively large quantities of unspecified brands from 6 highly sought-after breweries whose brands we must normally allocate very selectively across the country.”  Then Dan asked ABC to “accept” the amended distribution filing form for Proof “without a formal release from Freedom.”  Dan: “Our position is that Freedom cannot refuse to purchase and distribute our beers (at a profit) to retail customers that have already agreed to take them while also claiming ‘rights’ to distribute that prevent Shelton Brothers from using another North Carolina distributor to serve those same customers.”   Besides, Freedom’s actions in refusing to make the chain sale and pay what it owes Shelton, on their own “constitute a clear breach of its obligations to Shelton…and provide more than sufficient grounds for our immediate reassignment of the brands” to another distrib.  He also points out that the assignment is temporary and agreed to by Proof.

Will this be isolated spat between Shelton and a single distrib?  Or will it turn into lawsuit ultimately testing (and possibly weakening) a state franchise law, as happened in Missouri when Shelton won 2011 case after terminating Mo Bev?  That in turn led to the whole Major Brands fracas with Diageo and other wine/liquor suppliers.  With Christmas beer sales on line, likely that a decision on temporary restraining order will be resolved relatively soon.  As for long term implications, we’ll see.

Craft Brew Alliance made “solid progress” during Q3, ceo Andy Thomas opened earnings call today, standing in stark contrast to “very good quarter” he reported 3 mos ago. As CBA announced in advance last wk, volume softened and earnings squeezed mostly due to launch of operations in Memphis. But CBA execs repeatedly expressed during call this was one time only hit and sets up the co up for brighter future. Indeed, Andy expects the co will look back at 3Q14 as a “pivotal milestone on our journey,” as Memphis is “the bridge to the future.” So execs “feel very good about the overall trajectory of the business,” cfo Mark Moreland said. CBA also announced that Mark would be leaving the co at end of yr, planning to consult with the co thru mid-2015.

What’s biz look like now? Shipments up 2.4% in 3d qtr, led again by +14% Kona gain offset by Widmer -0.4% and Redhook -7.7%. All depletions trends running faster, +6% all in. And Redhook has biggest differential, seeing just 2% dip during qtr; Widmer depletions +4% and Kona +15%. Slower shipments trends in part due to “contingency planning” CBA did during Q2 in case of trouble in Memphis. For 9 mos, shipments trends still ahead of depletions for all but Redhook. CBA’s core shipments up 54K bbls, 10% thru end of Sep, with Kona still tracking over +19%, Widmer +5.5% and Redhook +3.6%, facing particularly tough comps during rollout of Game Changer and amped up energy behind Audible Ale last yr. CBA built revs 5% during Q3, but higher cost of goods (+8.4%) and selling, gen & admin expenses (+17%) ate away at gross profits and operating income. But again, those measures showing healthier 9-mo trends. Operating margin is up to 2.8% for 9 mos from 1.8% at this time last yr, but still modest.

Gross Margin Hit By Memphis in the Meantime  That “solid progress” Andy referenced certainly applicable to 9-mo gross margins, up to 29.5% from 28.7% last yr. But initiating brewing at Blues City Brewing in Memphis contributed to 2-pt squeeze on quarterly gross margin, down to 28.1%. CBA expected some unknowns going into Memphis launch, but didn’t quite see full picture. “Equipment constraints” getting beer out of Blues City presented themselves, coo Scott Mennen said on call. The co also had to rely on the “spot” or “open market” for freight, he said, and “Memphis is notoriously difficult in the summer for freight,” Andy added. So CBA spent what it needed to move beer around, as “not all the inventory was in the right place,” Scott said later. The inventory front-loading was also a reaction to more-problematic out-of-stocks CBA dealt with in 2013. The “worst thing you can do is run your wholesalers dry and not be able to deliver to retailers,” Andy said, particularly “in a market where there are very quick substitutes.” So CBA chose to take the margin hit and have plenty of beer for peak selling season.

Getting brewing up and running at Blues City is “a big deal,” Andy said on call, particularly for CBA’s future, as it provides “approximately 100,000 barrels of scalable capacity” near some pretty big markets that offer significant oppys to the co. Further, as the co looks to even out and improve gross margin, brewing at Blues City will offer “one-two punch of lower production costs and lower transportation costs,” Andy reminded. CBA targets 8-10K bbls of production per month, Scott said, all a part of CBA’s “rebalancing of production” and finding “a more comfortable production cadence.” The co has also secured all the barley it needs for next yr, so won’t be affected by volatility there, Scott said. As a result, CBA accelerated its guidance for hitting 35% gross margin in 2017. But in extreme short-term, CBA’s stock continued down 8% just today.

Kona Ads Added “35+% Lift”; Redhook Took SKU Rationalization “On Chin”; “Pure Craft” Widmer  Largest CBA brand family, Kona, still has “a lot of momentum,” cmo Ken Kunze said during today’s call. Its first foray into ad spend behind the brand resulted in a “35-plus percent lift” in data it’s seeing. That ad activity could be expanded in markets where Kona already has solid distribution or where ads can act as “vehicle” to put Kona on more shelves, Andy said. The brand’s also seeing “very strong growth” in home market Hawaii, Ken noted. Meanwhile, Redhook took brunt of SKU rationalization in Q1, but its “trends turned positive in September,” Ken said. Part of Redhook’s Q3 picture included switch of Buffalo Wild Wings’ limited-time only program behind Game Changer moving from Jul/Aug last yr to Dec this yr. Seasonal Out of Your Gourd Pumpkin Porter showed strong +43% growth this yr, too, Ken noted. KCCO Black Lager, collab with theChive, will become “standalone” brand next yr, “tied to Resignation Brewery.” As for “pure craft brewer” play Widmer Bros, CBA keeps seeing “improvements of Hefe,” tho strength of new 30th Anniv celebration brands “somewhat offset” by comparison to launch of Alchemy Ale during same period last yr. Meanwhile, Omission brands keep “growing aggressively,” +65% in 3d qtr, +95% YTD and showing a “five-point share lead” over next gluten-free brand, even tho it has at least 20-pts less of distribution, Ken said. 

Craft Brew Alliance quarterly earnings call (see below) included some juicy takes on current state of craft mkt, natch. “Competitive nature of the on-premise channel,” pushed from coupla directions, cmo Ken Kunze said. Besides “proliferation of local craft brands,” many of which focus efforts on-premise, Ken and co seeing “very aggressive pricing” for draft, particularly from ABI. So CBA execs “do not want to chase volume in a rapidly changing and deteriorating channel dynamic.” Andy built on those thoughts later, noting a “metamorphosis” with “more and more of those handles moving away from the majors and moving to craft.” From a “macro perspective,” Ken said, it means drinkers are “moving to craft,” but “incentives” in place keep pushing retailers towards more rotation. Tho draft traditionally the “more profitable package,” that’s “going to come under increasing pressure,” Ken thinks. So CBA is putting energy behind “building our national retailer group” on larger chain restaurants where “we believe we can win relative to the small local guys,” Andy added. When inevitable question about ABI buying 10 Barrel came up, focus was on valuation rather than any potential effect for CBA. So Andy noted an M&A “market that is pretty frothy in two ways.” Since “books come across our desk too,” Andy sees “very ambitious, and a little bit naïve, growth projections,” often with an “extrapolation of trends out on a straight line,” plus some very big multiples. All see more deals coming.

Craft hotbeds in Calif rife with clips about small brewers, including pair of stories this week about efforts to support small manufacturers in San Francisco and some criticism popping up about huge number of taprooms in San Diego. Non-profit SFMade releases report on big growth in small manufacturers, including breweries, in Bay Area this morning, per SF Chronicle. Report shows direct sales from “small enterprises” (not just breweries) up 32% this yr to $585 mil, employing 4000. Many more have opened “stand-alone retail outlets” too, the number of which has doubled over 2 yrs, according to SFMade. But big issues for SF manufacturers, like others in urban areas, include staying in city “when they start looking for bigger space,” exec director of org Kate Sofis told paper. So she’s working with city to find more spaces for manufacturing in city (like big spot currently under construction for new Anchor Brewing facility). Also of note, in city that’s home to lots of tech companies, some striking it rich in that sector have invested in small manufacturers. That includes Magnolia Brewing, that received $2.2 mil “from a number of investors,” to open new brewery and restaurant, founder Dave McLean told the Chronicle.

Down in San Diego, growth in number of taprooms separate from brewing facilities dinged by some locals, according to the Union-Tribune. The city sought a new requirement that breweries pick up a separate license before opening separate taproom, but “before the city could make such a change,” Calif ABC decided to allow “nearby residents and merchants” to “weigh in” on whether or not a new license should be issued. This ruling “is expected to slow somewhat the recent proliferation of such tasting rooms,” the paper wrote, but that doesn’t mean it’ll slow popularity of small brewers there whatsoever.

Find our summary of major distribution territory expansions initiated over the last two months here. We tracked over 3-dozen different companies expanding sales territory in Sep and Oct, including many major additions for some big craft players. 

Firestone Walker moved last week to megadistrib Columbia in Wash statewide, except Vancouver.  At presstime, it still hasn’t come to agreement with AB distrib there.  It’s only about 50,000 cases in all (less than 4,000 bbls).  But move significant in part because one big chunk of biz where it will transfer is in Seattle, which of course is AB branch.  Recall, that when AB branch bought K&L in 2012, it kept several leading craft brands like Firestone, Ninkasi, Alaskan and Elysian.  But apparently, Firestone Walker wanted to make the move. Under Wash law, it could easily do so.  Not done yet, but word is that Firestone Walker also working on transition out of AB network in neighboring Oreg. 

This brings back to fore question of how effective AB branches can be selling non-AB brands.  Can they be the most effective option for a supplier, given AB’s preference for its own brands?  And if not, what does that say for the surrounding AB distribs’ abilities to attract and/or retain other brands?  And yet if AB brings brands such as 10 Barrel into house, could make that less problematic.

AB has struck its 2d deal to buy a craft brewer in 2014, with the acquisition of 10 Barrel.  But this time it’s buying one of the hottest up-and-comers in one of the epicenters of the craft movement.  10 Barrel has been on a tear. It was founded in 2006 as Wildfire Brewing.  Changed named in 2008 and then began steep climb from just 1400 bbls in 2009 to somewhere over 40,000 bbls in 2014, CBN understands.  That would be another over 70% increase, following 2013 when it made big jump to 23,500 bbls and regional status, according to BA stats. 10 Barrel presently in just 3 states, Oreg, Wash and Ida.  And it also is about to open its 3d brewpub in the Pearl District in Portland (see last issue).  10 Barrel’s growth outsized in Oreg state data and IRI.  It stands out.  Doubled from 8,647 bbls to 16,100 bbls in Oreg last yr.  And this yr, it’s up another 7,000 bbls, nearly 70% thru Aug in home state.  10 Barrel is also #41 craft brewer in IRI stats, $$ sales up 125% in IRI multi-outlet + convenience thru Sep 7.   Deal expected to close by yrend.

AB purchase of 10 Barrel will likely send some shock waves thru craft community.  Yet 10 Barrel founders are staying in.  They intend to keep doing what they’re best at doing, brewing quality beer and running restaurants.  “We are excited to stay focused on brewing cool beers, get our beers in more hands and make the most of the operational and distribution expertise of” AB, said co-founder Jeremy Cox This deal follows AB purchase of NY-based Blue Point earlier this yr.  But in contrast, Blue Point was one of few top 50 craft brewers that didn’t grow in 2013.  AB will reportedly emphasize its East Coast origins, employing a regional strategy.  Recall, even Goose Island was not on a rapid growth trajectory at time it sold in 2011.  As of last yr, AB said it had more than tripled Goose Island volume and increased EBITDA by more than 10x.  Perhaps AB pushed it out too far too quickly.  But Goose Island reportedly up double digits again this yr and AB has bolstered Goose in many ways.  Next yr, focus will be on Goose IPA.  Prexy Andy Goeler’s presentation at AB’s recent natl sales meeting got standing ovation.  So AB has shown it is capable of taking different approaches with craft brewers and making them work.  It will be interesting to see what AB can do with this shiny new toy. 

How many craft brewers does AB intend to buy?  We’ve persistently heard that it has regional strategy, which would suggest it is likely to buy 1 or 2 more, say in Southeast or Southwest.  At some point, the US Dept of Justice could become more interested in its craft acquisition strategy, some speculate.  But so far these purchases are apparently so small individually that they barely seem to register. 

A busy week for “pearl”-related beer news. Out in Portland, Oreg’s Pearl District, a pair of familiar breweries plan to open new outlets. In unique move, Cleveland-based Fat Head’s Brewery celebrates grand opening of new brewpub in Oreg, the Portland Tribune wrote. The market known for its love of local brewers will be quite the test for the midwest-born company. Similarly, 10 Barrel Brewing, from not-nearly-as-far Bend, Oreg, plans to open another brewpub (it already has one each in Bend and Boise, Ida) also in Portland’s Pearl District. At same time, another crowded local market got a big new beer-focused outlet: a new World of Beer restaurant/bar plans to open on Boulder, Colo’s Pearl Street early next yr, according to the Daily Camera. The World of Beer franchise chain has grown significantly over last few yrs, now approaching 80 locations. It’s got 13 currently in the works, not including the Boulder spot, but one Milwaukee location may be struggling to stay open. The Brady St location in Milkwaukee, Wisc announced it would close last week on its Facebook page, one majority owner (who also owns franchises in Tenn and Fla) telling the Journal Sentinel “we just don’t have enough guests.” Other minority owners expressed desire to take over, however, after being a part of team that opened one of newest WOB outlets, in nearby Wauwatosa. Finally, a San Antonio entrepreneur plans to open a new brewpub at historic site of Pearl Brewery, according to San Antonio Biz Journal. The 22-acre campus that used to house Texas’ Pearl Brewery will soon be home of Southerleigh Fine Food & Brewery, joining a slew of other restaurants and retail outlets operating on the site. It’s also home to the Culinary Institute of America’s San Antonio school plus residential and event spaces. The brewpub, opening soon, brings brewing back to the complex.

Hoping to bolster support as well as raise funds, the Georgia Craft Brewer’s Guild turned to crowdfunding site IndieGoGo this week to help pay for lobbying in Atlanta. The group hopes to raise $30K over the next 2 months, tho as with all IndieGoGo campaigns, it’ll be able to put whatever it earns “to support our political lobbying efforts.” Recall, efforts to “modernize beer laws” in the state have struggled, so the state’s small brewers “lag behind because our state laws and regulations are out-of-date and inhospitable to craft beer entrepreneurs.” While the campaign text doesn’t lay out any specific regulatory goals, recall Georgia brewers have long sought on-site sales for both on- and off-premise consumption.

Some sizeable sales staff shuffles in SoCal last week, as Redlands-based Hangar 24 shifted focus of its team, laying off almost two dozen and hiring “about 50 new people,” founder Ben Cook told Redlands Daily Facts. Since the fast-growing brewery now sells “in larger grocery and bar and restaurant chains,” it sought a new team to handle those new tasks. It also “created a new director of operations position” recently to handle growth. It hit 35K bbls in 2015, up 46% according to Brewers Assn stats and is up 31% in IRI data thru Sep 7. Tho one laid-off employee told the paper the co faced a “financial crisis,” Ben countered that it’s “still growing like gangbusters.” Both revs and “distribution channels” up about 50%, Ben told paper, so “we’re having to make sure we have the right people in the right seats on the bus right now.” Recall, Hangar 24 runs a small distribution biz and has expanded distribution of its own brand to Nev and Ariz this yr. It seeks space to build a new brewery too, the paper wrote.